Want to do your bit for the environment? Don’t invest in a climate change fund. That’s according to a new paper – Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing – by researchers Noel Amenc, Felix Goltz and Victor Liu at French business school Edhec. As Steve Johnson notes in the Financial Times, not only do such funds not help, they may even be “undermining the fight against global warming”.
The authors looked at exchange-traded funds issued in Europe which track various climate-focused indices from major index providers. They found several problems. One is that climate data accounts for a very small portion (a maximum of 12%) of the rationale for including a given stock in an index. Market capitalisation matters far more. In other words, a fund manager can run a “closet business-as-usual” fund stuffed with big companies, but market it as a “green” fund.
A second, related, issue is that a fund can earn a “green” badge by avoiding or even just “underweighting” the dirtiest sectors, such as the energy sector. However, as we’ve noted at MoneyWeek before, pushing listed oil firms to sell their oil fields doesn’t make the oil go away, it just moves it to a less transparent (and often less competent) operator. And as the authors point out, “it will be less easy to greenify the economy by doing away with electricity.” So just avoiding the energy sector won’t help the transition to a greener economy.
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This implies that “engagement” – owning shares so as to pressurise company managements to shift direction – is the best option. Yet the study finds that companies whose environmental impact deteriorates over time (by emitting more carbon dioxide, for example) often see their weightings in an index rise rather than fall, implying that these “strategies are basically indifferent to the evolution of climate performance”. As a result, “the investment industry... does little to reallocate capital in a direction and in a manner that could incentivise companies to contribute to the climate transition.”
The study backs what many have already noted about such funds: there is often little clarity or agreement on the methodology or rationale involved. With the sector growing in popularity (assets in sustainable funds tripled in the three years to mid-2021, reports Morningstar), “greenwashing” (sometimes inadvertent) is rife. If you’re still keen to invest in a manner compatible with your views on the environment, then get your hands dirty and build your own portfolio, or at least be sure you know what’s in the funds you choose to buy. For the rest of us, now looks a good time to buy cheap, high-yielding fossil fuel stocks while the wider market’s attention is elsewhere.
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